New Zealand: The Supreme Court has delivered a decision in the insurance case of Ridgecrest NZ Limited v IAG New Zealand Limited

The Supreme Court decision arises out of a request by IAG and
Ridgecrest for the Court to determine a preliminary question - is
Ridgecrest entitled to be paid for the damage arising from each
event up to the limit of the sum insured in each case?

The Supreme Court's decision is different to the decisions
of the High Court and the Court of Appeal, both of which had
decided the preliminary question in IAG's favour - albeit on
different grounds.

The Supreme Court decided that Ridgecrest is entitled to be paid
for the damage arising from each event up to the limit of the sum
insured in each case but the decision is particular to the policy
wording and subject to some caveats.

When considering the decision some key points should be borne in
mind:

The decision was reached on the basis of the particular policy
wording. As the High Court had previously noted, the context for
the preliminary question was "the interpretation of the
individual contract in its own commercial context". The
wording is not generally seen in material damage policies in New
Zealand. In particular:

It does not contain a general aggregate clause; and

It does not contain a reinstatement clause which is a procedure
for reinstatement of cover after a claim has been met and
determines how an insurer's obligations in those circumstances
are to be met.

The fundamental principle of insurance law – the
indemnity principle – is confirmed meaning that an insured
cannot double count its losses. In this case, Ridgecrest cannot
recover more than the reinstatement value of the building because
IAG and Ridgecrest are said to have understood that the sum insured
was not based on and was less than the replacement value of the
building. Where this is not so, an insured may still be limited to
a lower sum insured as the measure of its loss, not the
reinstatement value.

While an insured is entitled to cover for damage caused by
earlier earthquakes where that damage is unrepaired, the damage is
compensated on an indemnity, not replacement, basis. This is
because replacement is not, in fact, possible.

The facts

Ridgecrest owned a commercial building in Christchurch. The
building was insured with IAG.

Ridgecrest was insured for loss or damage to the building, as
well as replacement cover for loss or damage that is restored or
replaced. The policy provided for a sum insured of $1.984 million
as being the maximum amount payable "in respect of any one
happening".

During the policy period, the building suffered damage in four
earthquakes - 4 September 2010, 26 December 2010, 22 February 2011
and 13 June 2011. IAG commissioned builders to repair the damage to
the building caused by the 4 September 2010 and 26 December 2010
events, but this was not completed by the time of the 22 February
2011 earthquake. No further repair work was carried out after the
22 February 2011 earthquake.

As a result of either 22 February 2011 or 13 June 2011
earthquake the building was damaged beyond repair. IAG and
Ridgecrest disagree on which earthquake caused irreparable damage,
but both agreed that by 13 June 2011 at the latest the building was
damaged beyond repair.

IAG paid Ridgecrest the sum insured of $1.984 million but said
that its liability for earlier earthquakes was limited to the cost
of repairs actually undertaken. Ridgecrest disagreed, saying it was
entitled to the sum insured of $1.984 million as well as the
estimated cost to repair damage caused by the earlier earthquakes
(whether those costs were incurred or not).

The Supreme Court

The Supreme Court decided that there were three questions for it
to determine:

Whether the policy, when construed in the context of the events
that happened, required IAG to make payments in relation to the
earlier earthquakes.

Whether the losses resulting from the earlier earthquakes are
to be treated as merged or subsumed in the losses caused by the
final earthquake. (The basis of the merger principle applied in
marine cases is that a smaller partial loss is overtaken by, and
subsumed in, the subsequent larger total loss.)

Whether Ridgecrest's claim is precluded by the indemnity
principle, under which an insured is preventing from recovering
more than the amount of the loss.

The Supreme Court found that:

Ridgecrest is entitled to be paid in respect of the damage
caused by the earlier earthquakes up to the sum insured for each
earthquake as well as the sum insured in respect of the final
earthquake. However, for damage caused by earlier earthquakes
Ridgecrest was entitled to a payment on an indemnity basis (rather
than replacement) for damage sustained in each earthquake.

As a consequence of the policy resetting after the earlier
earthquakes in relation to the building in its damaged damage and
providing replacement cover in that state, the damage caused by the
earlier earthquakes does not merge with Ridgecrest's
entitlement in relation to the final earthquake.

By reason of the indemnity principle, Ridgecrest is not
entitled to recover more than the replacement value of the building
and may not double count the losses.

Conclusion

The decision will likely not have general application to all
earthquake claims because it is specific to the policy wording in
this case. There are some aspects of the decision, however, where
the Court has made some findings which are not specific to the
policy wording and will be of more general application. That is,
that the indemnity principle applies and cover for partial damage
from earlier earthquakes is indemnified on an indemnity basis, not
a replacement (new for old) basis.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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